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Islamic Guidelines on Investing in the Stock Market

Investing in the stock market, regardless of whether it be a domestic company or a multinational corporation and regardless of it being the company in which one works, is only permissible given the following guidelines:

One must avoid investing in industries that are forbidden or doubtful, such as commercial banks that deal in interest, government bonds, insurance companies, pornography, companies that sell or produce tobacco or alcohol, gambling casinos, nightclubs, companies that sell forbidden food items or drugs and the like.

For those scholars who allow investing in “mixed companies” (those companies that produce a mixture of permissible and impermissible products), which is a large number of scholars, they add the additional conditions for such companies:

The essential business or goals of the company must be something that is permissible, such as agricultural products, trade, manufacturing, technology and so forth.

The proportion of forbidden dealings must be small and as minimum as possible with respect to the overall activity of the company, whether that be with respect to their expenses, loans, revenue or investments. Some of the Shareeah Advisory Boards have, via ijtihad, come up with the following recommendations: The forbidden expenses of the company cannot be more than 5% of the total expenses of the company; the total debt of the company divided by the market capitalization cannot be more than 30%; forbidden income as a percentage of total income cannot be more than 5%; and total interest-bearing securities divided by market capitalization must be less than 30%. These percentages are approximations determined through ijtihad. The goal is to minimize the forbidden aspects as much as possible.

One should then “purify” the profits they receive by giving away to charity the percentage that comes from forbidden sources.